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Robinhood is a stock brokerage that hopes to bring commission free trades of stocks to the masses.

It's an app-only brokerage that offers $0 commission trades on stocks – no minimums, no maintenance fees, and a streamlined interface that is intuitive to use.

When they first came on the scene, I immediately thought of Zecco. Zecco was a brokerage founded in 2006 that promised commission free trades too. The free trades got more and more restrictive. At the start, everyone had free trades. Then you had to have a minimum account balance of $25,000. Eventually, there were limits on how often you could trade until TradeKing acquired them in 2012.

It felt like the business model of free trades was defying the laws of mathematics.

So how is Robinhood different? Zecco was trying to be a full brokerage – you could trade stocks, options, mutual funds, and bonds. They would offer Forex, gold, and silver too. They had a multitude of tools and analysis. Zecco was trying to be a full brokerage but charge nothing.

Is Robinhood Legit or a Scam?

You know the adage: “If it sounds too good to be true…” in this particular case, it's true.

They use Apex Clearing Corporation to clear trades and they are registered with the SEC to operate in all 50 states (and 2 territories).

They are a member of Financial Industry Regulatory Authority (FINRA – check their broker listing) and have Securities Investor Protection Corporation (SIPC) insurance, so your balance is protected up to $500,000 (with a $250,000 limit on cash). This is to protect against fraud, not loss of value.

They are not a scam.

For a limited time, they're offering free share of stock (valued between $3 and $150) for new accounts if you get a referral. Click this link to use my referral and enjoy your free share!

How does Robinhood make money???

This is the billion dollar question – how can a company giving away free trades make money?

The answer lies in their FAQ answer on the subject! They plan to collect interest from customers who upgrade to a margin account, which is currently in beta. They will also earn interest from customers' uninvested cash balances.

They also offer Robinhood Gold – which gives you 2x the buying power and after-hours trading at a cost of as little as $10 a month. It's optional and trading is still commission free.

In the future, they could make money off order flow – which is a rebate that exchanges give for providing liquidity. It's not something they do now since they go through a clearing partner, but they can jump into it once they have the volume.

OK – so far so good.

How is the service?

Signing Up for an Account

I signed up on my computer, rather than on my phone, because I'd rather not type in a bunch of account information on a tiny keyboard. The sign-up process takes about 5-10 minutes and you'll need to provide some basic information – name, address, Social Security, birthday, and some other demographic information.

You'll also be prompted to link up your bank account and transfer in funds. They have support for a lot of major banks (nearly 20) and you'll be able to log in directly from Robinhood and transfer funds.

Once you sign up, you just need to download the app, log in, and you're off to the races.

What I Like About Robinhood

Robinhood is free but it doesn't feel completely bare-bones — which is very important.

You get free trades and free trades are great. You can set market, limit, stop loss, and stop limit orders. You are, however, limited to U.S. stocks and ETFs. That's a fair trade. No short sales.

No account minimum and no maintenance fees unless you want paper statements ($5) or paper confirmations ($2). You don't need paper statements and those fee rates are consistent with others I've seen. These are all good but they should be there, it's pretty standard nowadays.

Dashboard is sleek and minimalist. When you log in, you're greeted with your account value, some historical charts, and relevant stories in a slider at the bottom. Green if you're up, red if you're down.

Robinhood Instant: There's a “feature” called Robinhood Instant. Normally when you sell a stock, you have to wait about three days for the funds to make it to your account. It's known as “Stock Settlement” and it's because of how the clearinghouses work (If you trade individual stocks infrequently, this will never come up). Instant would take away that three day wait. (another benefit is instant access of up to $1,000 on deposits to Robinhood)

What I Don't Like About Robinhood

You can only access your account via a smartphone app. Fortunately you can sign up online, which can make the data entry faster, but the account itself is only visible via app. Both Android and iOS are supported, so you get a lot of coverage there, and I might be showing my age but only having access on my phone is unnerving.

The above “con” was crossed out because in 2017, Robinhood rolled out a web interface that is similar to the app but easier to use.

Placing a trade is… somewhat cumbersome. If you want a market order, it's a fine interface… but you should never put a market order. If you want to place a limit order, you need to enter a price on a separate screen. Once you select a price, you pick how long to keep it open (Good for Day or Good till Cancelled), then it goes back to the order screen and you complete your order.

After you place the trade, it could be executed immediately or some time into the future. If you want to see your order, you have to go to History. You can't edit the order, you have to cancel it and then re-enter the order (most places will let you “edit,” but functionally they cancel and enter in a new order… they just save you the work).

If you aren't making a free trade, it gets expensive. Listed foreign securities are $50 a trade, Euroclear is $35 a trade, Canadian is $35 a trade, and all broker assisted phone trades are $10 (the last one isn't bad). You can see their full fee schedule here.

No analysis. They don't have any reports and they don't have any analysis tools. There are news notifications and historical price charts but that's about the only thing outside of executing transactions. Though, to be honest, I wouldn't expect any considering the transactions are free.

You are limited to one account type – taxable. Sorry, no retirement accounts (and their paperwork requirements, which is probably why they're not provided yet).

No broker transfers. If you want to move brokerages, you can usually do an ACAT (automated customer account transfer) and it moves your assets over for something like $50 or $100. The ACAT process lets you move your account without selling securities (and realizing gains). Robinhood doesn't offer that. (TradeKing offers up to $150 in reimbursement on ACATs, which are charged by the originating brokerage, of $2,500 — to give you a sense of how much an ACAT costs)

No automatic dividend reinvestment, yet. If you get a cash dividend, it's deposited into your account. They don't have automatic dividend reinvestment but a support post says they hope to offer it in the future. Though when the trades are free, you could manually reinvest it at no cost as long as you have the cash since Robinhood doesn't offer fractional shares (very few places do).

No short selling. For most, not a big deal but short selling is part of the market and you won't be able to do it on Robinhood.

No API, so no integration with Personal Capital. Not unexpected and certainly minor, but I can't link this account in my Personal Capital dashboard. 🙁

Parting Thoughts

I'm impressed. The app is straightforward (love the green on black color palette when the market is closed, green on white when it's open) and streamlined, it was easy to navigate for someone familiar with smartphones, and when transaction cost is the main differentiation in this space, you really can't beat it.

It delivers exactly on what it promises – free stock trades. What more can you ask for?

Personally, I trade stocks very infrequently. When I do, it's usually a dividend stock and I hold it for years. Saving a few bucks each time isn't something that really excites me but I downloaded the app to play with it and for this review – I'll probably buy something and treat the account as a fun money account. 🙂